Does Size Matter?
Last week’s post demonstrated the trend of nearly doubling the average American house size in just one generation and the forces at play that make this seem reasonable. We discussed the huge savings we have had by simply bucking this trend and instead buying less house than we have been told we could afford. We promised to share with you the mistakes we have made with real estate which could allow you to do even much better than us and our anticipated 15-16 year working careers to reach financial independence. So without further ado, our biggest mistake we have made when it comes to real estate has been………………….
WE HAVE SPENT TOO MUCH ON HOUSING THAT IS MUCH BIGGER THAN WE NEED!
That’s right. Despite spending well under 50% of what is “affordable”, we own and have owned far too much house and have thrown away significant money and time doing so. We have drunk some of the “Your Home is an Investment” and “A Bigger, Nicer House Will Improve Your Life” flavored Kool-Aide.
Buying a house was the first thing we wanted to do after getting out of school and getting married. When looking back, that ended up being the least happy time of our married lives. We were both working over 50 hours/week getting established in our new careers. We chose a house location giving us each nearly a 45 minute one-way commute each day. We now had a nice house with all that went with it to care for on top of everything else eating away at our time. We were quickly burning out. Fortunately, we realized this and acted on it quickly. We were very lucky to be able to break even while selling the house after only two years, and so we moved on.
When we moved to our current town, we had a hard time finding a place to live. We ended up settling on a little $300 month apartment in a neighborhood where we did not want to live. The place was so small, we couldn’t get our box spring up the stairs unless we broke it and so we decided to just throw down our mattress and sleep on the floor without a full bed. We had little space and no yard to maintain giving us a lot of extra time to do whatever we wanted, despite working very hard in our careers. We also were able to save at a ridiculously high rate during these nearly three years because the rent was so cheap. This allowed us to put down nearly 50% cash on the home we ended up building. In retrospect, we were surprisingly very happy in this place, despite the fact that we never wanted to live there, probably because of the surplus of time and money we had not spent on the house.
A minimalist would say that less is more and that a smaller house forces you to own less clutter, have more time and focus more on what is important in life. Conventional wisdom is that home ownership will improve your life, and bigger houses are obviously better based on the doubling of the average house size in just the last generation. I tend to think that size (and many other things we all typically look for) simply doesn’t matter.
Your home can contribute to your happiness if you choose it to be close to your work, activities, friends and family so you limit time wasted commuting everywhere. It also can contribute to happiness if you utilize it to spend time with family or entertain. There is little or even a negative relationship between happiness and things that most people look for when choosing a home such as square footage, number of bathrooms or whether you have hardwood floors and granite counter tops.
This has been our experience in our current home. We designed our current house and had it built to our specifications. We were very excited to move in but found very quickly that we were unhappy here. We were never home. When we were, it was because we had to work on keeping up the house and yard. Currently, we are very happy in this house. However, my wife now works from home and we spend much more time here with our daughter. We have become good friends with our neighbors. We walk regularly to the nearby park and live only a block from family who have a young girl who our daughter loves to play with. Same house, totally different levels of happiness and satisfaction.
The other major mistakes that we made all involved being focused on paying our house off quickly with the idea that this would give us financial freedom and was a great investment. One mistake we made was being totally oblivious to the world around us and continuing with this goal as the markets crashed in 2008, presenting one of the all-time great buying opportunities across stocks, bonds and real estate. We simply kept our heads down and plowed away, paying off a mortgage with a 4.5% interest rate which was tax-deductible, while passing up on the opportunity to buy more investments that have since more than doubled in value. Granted hindsight is 20/20, and no one can accurately predict what markets will do in the short term. However,you don’t have to predict anything to know that the upside of paying off a 4.5% mortgage after taking a deduction gives a real return of about 3%. It is easy to know that any time markets fall that you are essentially buying investments at sale prices and can expect higher than average returns. Any of these investments should average better than 3% return over time. This mistake of completely ignoring the expected investment returns of different options has cost us six figures in our current net worth. Now when bond interest rates are at historic lows, the stock market sits at all time highs, and real estate has mostly rebounded the upside of each of these investments is much less. The alternative of paying into a mortgage could be more reasonable even if still not optimal. We took that option off of the table by paying it off too quickly. For a great discussion of all that goes into making an intelligent decision on optimizing paying off your mortgage versus investing, give this episode of the Radical Personal Finance Podcast a listen.
Our other major mistake was overestimating the impact of having a paid off house on our financial independence and early retirement. We suffered a major let down soon after getting the house paid off . We quickly realized that while this signigicantly lowered monthly living expenses, we were nowhere near financially independent. Instead of paying off the house as part of a reasonable plan, it basically was our plan. When we realized we were nowhere near financial independence but had this big chunk of extra cash every month, we did what most people do and looked for a place to spend it, buying a new car for the first time in our lives.
Housing costs are a massive expense for most Americans. As you can clearly see after reading this and last week’s posts, housing decisions provide many great opportunities to improve your financial situation. Despite doing relatively well compared to the average consumer, we have easily wasted over a quarter of a million dollars by buying more house than we needed, paying the associated costs, opportunity costs of paying our current house off too quickly without considering investment options and tax considerations and then wasting money due to not having a plan after paying off our house. There are many options to optimize your situation without sacrificing any happiness or satisfaction with life simply be making a few key decisions differently. These include making an informed decision to rent or buy, buying the right amount of house for you rather than listening to what others think is affordable, realizing that the things most people think are important in a house can not bring you happiness, and developing an intelligent plan for paying off a house. Consider all of these factors when making your decisions. Housing costs are a great place to start when looking to start on the right foot to financial independence and early retirement.